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What does "hedging" mean in this context?

• TradingPlaces 4y ago
  Big companies have lots of assets on their balance sheets. Mostly this is “cash equivalents” like short-term US Treasury debt, or overnight repo agreements. But they also have equity stakes in other companies like the one described here. The cash equivalents don't change in value, but the equity stakes do, and unrealized losses on equity can make their way into the operating statement and ruin a quarter. So CFOs use options and futures to hedge against these risks, by betting that the stock will go down. If the equity stake is 5% or more, they have to report every transaction to the SEC, and when that filing became public, the headline would be “MICROSOFT IS SHORTING APPLE!” and would lead to at least a short term decline in Apple stock. So Jobs’ suggestion is that they either take a 4.99% stake that dispenses with all reporting requirements, or forego hedging for 9 months.
  • reactspa 4y ago
    Got it, thanks.
  • simonh 4y ago
    Interesting that he just takes it as a matter of fact that they will want to hedge the position. No concern that they're betting against Apple, or not showing commitment, it's just of course they would. That's just business, what he's concerned about is the optics.